Opponents of net neutrality (primarily Internet Service Providers (ISPs)) have argued that any legislation forcing them treat all traffic equally and prohibit them from traffic shaping, throttling, two-sided pricing, or blocking of content would adversely affect the ISPs’ ability to invest in infrastructure improvements and new technologies, and would ultimately be detrimental to the end users Internet experience. They argue that the ability to differentiate prices (tiered pricing) would incentivize ISPs to invest in improvements to their network and, conversely, that the inability to extract different rates from different types of content providers/users would disincentivize them from investing. The fundamental economic argument is that the more pricing power a producer/provider has the more investment that producer/provider is willing to make in future goods and services.
At first blush this makes a lot of sense. The more pricing power a company has the more money it makes and the more capable it is of making future investments. Warren Buffet is a huge proponent of the concept of pricing power in choosing investments (See’s Candies, American Express and Coca-Cola being but a few examples). A business with pricing power traditionally does very well in the markets place (as a counter-example look at newspapers in today’s market). However, we should be careful not to confuse financial success with economic incentive to increase business investment. In my next post I'll explain why tiered pricing (and pricing power) do not necessarily lead to more investment.
Good Talk,
Tom
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